Wednesday 11 June 2008 19.01 EDT
First published on Wednesday 11 June 2008 19.01 EDT

It is not just that the government's electoral prospects look terminal. Its great predicament is that no one in or near the cabinet yet looks capable of fixing the underlying political problem. The issue is not Gordon Brown's personality or leadership style, but an inability to deal with the twin challenges that confront all the main parties and leaders: the failure of the market and the failure of the state. Without addressing these two fundamental questions, swapping leaders in an internal coup or swapping government through a general election will mean politics continuing to disappoint and society continuing to shrink.

Since 1979 Britain has lived in a Neverland of market fundamentalism that New Labour has mostly failed to challenge and too often sought to embed. From being the problem that social democracy existed to correct, markets were regarded as the cure-all.

But market fundamentalism took hold for a reason: the failure of the state. The inability of the centre-left to modernise the state for new, less deferential, more decentralised times left the door open for free-market ideologues. People wanted a voice but got only a remote bureaucracy. The state was cast as the problem instead of the answer, and was reformed on market lines first by Thatcher and then New Labour.

That left Labour governing in conflict with its central purpose - using competition to fix the social recession that market fundamentalism created in the first place. For 11 years Labour has been trying to achieve fairness using the very tools that exacerbate the problem. The poverty created under Thatcher has become not just a permanent feature of life under New Labour - it has got worse. This week's figures on youth and pensioner poverty are an indictment of any socially minded government.

Voters in Reading and Rotherham are left reeling as market forces in both the economy and the state leave them more isolated and vulnerable. The result is the collapse of the New Labour coalition. Gordon Brown, despite Herculean efforts, cannot paper over the cracks of a contradictory project kept alive by spin, charm and debt.

The centre-left project will be renewed only by facing the challenges of market and state failure. While no one in the cabinet looks capable of understanding the scale of the challenge, let alone coming up with answers, the nation looks to David Cameron.

The Tory leader at least seems to recognise the problem's scale and talks the language of the broken society; but will he regulate the market or revive the state? One-nation Conservativism, if he can rediscover it, offers some respite from free markets. It is paternalistic but has an organic view of society in which the rich and powerful have some obligation to the poor. This can be more progressive than the market-first politics of New Labour. But for the moment the Tory party is likely to resolve itself only in favour of charity: a sticking plaster on a broken society that won't hold.

Cameron likes to say that in the 1980s the Tories fixed the economy; now it is their historic duty to fix society. But surely he must know that the market fundamentalism introduced by Margaret Thatcher was instrumental in creating the broken society he now stands ready to fix. Cameron can be taken seriously only if he renounces Thatcherism as an aberration in Conservative philosophy and practice. It's unlikely - but who knows? New Labour became the party of big business out of electoral expediency. Means shaped ends. Can the reverse now happen to the Tories? If you wear the mask for long enough, the face starts to fit.

But in the absence of such a Clause Four moment, the cycle of political disappointment will quicken: first Labour's demise in the 1970s after the long postwar settlement; then 18 years of Thatcherism before she was turfed out; and now 14 years of New Labour facing equal rejection. But if Cameron comes in as the heir to Blair he will meet the same fate, only faster. All the time people retreat from politics because it makes no difference to their lives: markets always win and the state feels like it fails.

All the challenges of the 21st century demand new forms of collective action, and nowhere is there popular support for more markets.

If Labour is incapable of making the switch, then those inside the party must start looking outside. Labour was always a necessary but far from sufficient vehicle for centre-left advance. Gordon Brown kicked off his premiership with a government of all the talents. But it was just his right hand that was extended to dissident Tories and business interests. This exacerbated the market fundamentalism problem. Just as the centre-left advanced in the past, so in the future it will take a movement of academics, intellectuals, open-minded politicians of all progressive parties, campaigners, activists and trade unionists to renew not just the centre-left, but a belief that politics can make a difference.

· Neal Lawson is chair of the pressure group Compass; its annual conference, Born Free and Equal, is sponsored by the Guardian in London on Saturday